Consequences Of Dissolution of Firm

Consequent to the dissolution of a partnership firm, the partners have certain rights and liabilities. These rights and liabilities are discussed below.


Rights of a Partner on Dissolution

1. Right of equitable distribution of firm’s property: According to Section 46 of the Act, every partner is entitled to have the property of the firm applied in payment of debts to the third parties and the other liabilities of the firm and have the surplus distributed amongst the partners or their representatives according to their rights. This right is also described as partner’s general lien.


2. Right to return of premium on premature winding-up: If a partner joined a firm for a fixed term, and had paid a premium (goodwill), and the firm is dissolved before that fixed time, he has a right to the return of the whole or part of the premium. The amount of premium will depend upon (i) the terms upon which he became a partner, and (ii) the length of the time during which he was a partner. For example, Ram entered into partnership of a firm for a period of 10 years and paid Rs. 1,000 as premium. The firm was dissolved after expiration of two years because of the insolvency of a partner. Ram shall be entitled to Rs. 800 as return of the premium. However, such a partner will not be entitled to claim any return of the premium when the premature dissolution is (i) due to death of a partner, (ii) due to the misconduct of the partner who paid the premium, and (iii) where the firm has been dissolved according to an agreement which had no provision for the return of premium or any part thereof.


3. Right in the event of dissolution on account of fraud or misrepresentation: Like any other contract, the partnership contract can also be rescinded on grounds of fraud or misrepresentation and the aggrieved partners, besides other rights, will have the right to claim damages. Section 52 of the Act gives the following rights to partners where the partnership is rescinded on grounds of fraud or misrepresentation.

i) Lien of surplus assets: For any sums paid by him for purchase of a share in the firm or for the capital contributed by him, the partner rescinding the partnership contract has right of lien on the surplus assets left after the debts of the firm have been paid.

ii) Right of subrogation: For all payments made by him towards the debts of the firm, the partner rescinding the partnership ranks as a creditor of the firm. In other words, if he has used his personal assets to pay off the debts of the firm, he becomes a creditor of the firm for that amount.

iii) Right to be indemnified: The partner rescinding the partnership contract has the right to be indemnified by the partner or partners guilty of fraud or misrepresentation against all the debts of the firm.


4. Right to restrain any partner or his representative from use of firm name or firm property: Subject to contract between the partners, a partner during the continuance of winding up has the right to restrain every other partner or his representative from carrying on a similar business in the firm name or making use of any of the property of the firm for his own benefit till the accounts of the firm are completely settled and the affairs of the firm have been completely wound up. Of course, where a partner has bought the goodwill of the firm, he can carry on the business in the firm’s name and cannot be restrained by other partner or his representative from using the firm’s name even during the pendency of winding up.

Liabilities of a Partner on Dissolution

1. Liability for acts of partners done after dissolution: For third parties, partnership continues till a public notice is given of its dissolution. Therefore, each partner of the dissolved firm continues to be liable to third parties for any act done by any of them even after the dissolution and such acts are deemed to be acts done before dissolution. For example, A, B and C are partners in a firm trading in rice, they decide to dissolve the firm from August 1, 2019 but fail to give a public notice of its dissolution and continue the business of the firm even after that date. On August 10, A enters into a contract with D in firm’s name to deliver five quintals of rice to D. The firm is liable for the consequences of the contract.

It should be noted that the following shall not be liable for acts done after the dissolution of the firm even though no public notice has been given.

i) the estate of a partner who died

ii) the estate of a partner who is adjudicated as insolvent, and

iii) a sleeping or dormant partner who has retired from the firm.


2. Liability for winding up the affairs of the firm and completing unfinished transactions: According to Section 47, after dissolution of a firm, the authority of partners to bind the firm as well as their mutual rights and obligations continue to operate, as far as may be necessary for the following purposes.

i) to complete the winding up of the affairs of the firm. For example, to realize the dues from the debtors, to pay off the creditors, and dispose of the partnership property, etc.

ii) to complete all unfinished transactions that had begun before dissolution. For example, supplying goods for orders received by the firm before dissolution. Thus, the partner’s liability in respect of the above matters continue even after the dissolution of the firm.

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